Differences between fixed and adjustable loans

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With a fixed-rate loan, your payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily toward interest. That gradually reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call American Pacific Mortgage at (209) 357-7000 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a certain amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — this means that your rate won't exceed the cap amount.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.

You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (209) 357-7000. It's our job to answer these questions and many others, so we're happy to help!

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